Let me say at the outset that I am far from enthusiastic about either of President Barack Obama’s major policy initiatives: healthcare reform and the banking reform plan announced on Thursday.

But both cases are truly momentous, because both are tests of whether America is an imperfect democracy (like all the others) where government by the people eventually works, more or less, or a totally dysfunctional oligarchy.

Each initiative involves a confrontation with powerful vested economic interests whose lobbyists will no doubt fight long and hard in public and even longer and harder behind closed doors to block the changes.

The only difference between the two cases is that, while there may always have been significant popular opposition to the healthcare reforms, the need to “do something” about Wall Street is almost universally accepted on Main Street.

So if Congress blocks bank reform, it will represent a signal triumph of the lobbyists over the popular will.

It is not as if the Obama plan is particularly radical or punitive – after all, it was drafted by ex-Fed Chairman Paul Volcker. The 3 percent or 4 percent fall in the shares of the banks most likely to be affected suggests investors are relatively relaxed about a “Glass Steagall Lite” on both sides of the Atlantic (the assumption being that Britain will inevitably follow where America leads).

Much depends on the small print. But the President’s rhetoric is running away with him (not for the first time) when he says he will ensure that “never again will the American taxpayer be held hostage by a bank that is too big to fail”.

In fact, he is guilty of serious overselling if he is proposing nothing more than a ban on banks from running their own proprietary trading desks and “owning, investing in or sponsoring” hedge funds and private equity groups. This is all a long way short of the original Glass-Steagall Act of 1935-vintage, which completely separated investment and commercial banking.

Instead, the Obama-Volcker plan amounts to nothing more than preventing existing mega-banks from indulging in one or two of their lucrative sidelines. It does little to address the real causes of the current (and probably the next) crisis: excess leverage, permitted by moral hazard and driven by heads-I-win-tails-you-lose management remuneration packages.

The minimum that is required to rule out a future blackmail-bailout is to reduce both the size and the scope of banks.

When Mervyn King, the Governor of the Bank of England, offered his view that if a bank is Too Big To Fail, it is too big, the British government passed over the comment like a risqué joke at the vicar’s tea party.

Yet the original Glass-Steagall regime worked quite well not simply because it forced U.S. banks to be either risk-taking high-rollers or staid deposit-takers. At least as important was the fact that most of America’s thousands of banks were tiny – many had only a single branch, very few had more than a dozen, because many states banned out-of-state banking altogether.

In this scenario, with “small” deposits insured, there was no retail bank large enough to be in the Too Big To Fail (TBTF) class.

Leaving aside the fact that the Obama proposals show the same bizarre fixation with hedge funds and private equity as their European counterparts, they do leave one wondering whether the proponents slept through 2007-8. The mainstream banking system’s ultimate undoing was the shadow banking system.

The banking giants not only took excessive amounts of debt on to their own balance sheets, but used special purpose off-balance sheet vehicles to take on even more. They were able to find lenders for these so-called conduits only because they “enhanced” i.e. guaranteed these loans, a fact which investors and the regulators overlooked at the time.

The question arises then: where is the mechanism to stop Obama-regime banks doing exactly the same again, possibly this time using off-balance sheet vehicles not only for borrowing but also for the newly-banned activities: proprietary trading, hedge fund investments and any others they may invent?

Of course, the old-fashioned narrow sort of banking is dull, boring and, worst of all, provides no scope for paying multimillion pound salary packages. This is precisely why I expect the banks to fight the President’s proposals every bit as hard as they fight against direct limits on their precious bonuses.